‘Seller’s Remorse’ Claim Revived by 2nd Circuit

(CN) – An investment fund that sold its claim to liquidated Madoff assets for less than it was worth may yet unravel the deal, the 2nd Circuit ruled Friday. The British Virgin Islands-based Fairfield Sentry lost 95 percent of its assets when Bernard Madoff was indicted on 11 counts of fraud for running a Ponzi scheme, and its $960 million investment with Bernard L. Madoff Investment Securities (BLMIS). disappeared. Sentry eventually settled with the BLMIS trustee for a $230 million claim in the firm’s liquidation, pursuant to the Securities Investor Protection Act (SIPA). Shortly after Madoff pleaded guilty to securities fraud, however, Sentry itself declared bankruptcy. The company auctioned off its claim against BLMIS to Farnum Place, a Delaware corporation, for 32.125 percent of the claim’s allowed amount. After Sentry’s trustee agreed to Farnum’s bid, however, the BLMIS trustee received an additional $5 billion from a forfeiture, increasing the value of Sentry’s claim by approximately $40 million. Since the claim was now worth far more than when Farnum made its bid, Sentry sought to invalidate the sale. But the bankruptcy court rejected Sentry’s application for review, charactering it as “seller’s remorse,” and finding that “comity dictates that this court defer to the BVI [British Virgin Islands] judgment.” A federal judge in Manhattan affirmed the ruling, but the 2nd Circuit reversed Friday. “We disagree with Farnum and the bankruptcy court that the SIPA Claim is not within the territorial jurisdiction of the United States,” Judge John Walker Jr. said, writing for a three-judge panel. Any property subject to “attachment or garnishment” in a U.S. federal or state court is considered to be within the territory of the U.S., the 20-page opinion states. “The language of section 1520(a)(2) is plain; the bankruptcy court is required to conduct a section 363 review when the debtor seeks a transfer of an interest in property within the territorial jurisdiction of the United States,” Walker wrote. “Moreover, it is not apparent at all that the BVI Court even expects or desires deference in this instance,” he continued. “The BVI Court expressly declined to rule on whether the Trade Confirmation required approval under section 363.” On remand, the bankruptcy court must consider if the increase in value of the SIPA claim between the signing of the agreement and approval by the bankruptcy court invalidates the sale.